Sempra Energy Gets Second Unrestricted License to Export LNG

Sanctions against Russia have reshuffled the global energy deck and the second company to get an unrestricted export license stands to benefit, so MoneyShow's Jim Jubak is adding shares as of today, September 3.

Let’s not talk about stock market winners from the war in the Ukraine. Too many people have died and more are likely to die in what promises to turn into an even nastier war.

But the sanctions against Russia as Europe and the United States try to persuade Russia to temper its military intervention in Ukraine have already reshuffled the global energy deck in ways that remove the biggest risk hanging over the leading edge of the effort to build liquefied natural gas (LNG) export facilities in the United States, Australia, and the Middle East.

The sanctions against the Russian energy sector will mean that the aging fields of Siberia and the still-to-be-developed fields of the Russian Arctic will be starved for capital and technology. And that means any new natural gas from Russia, especially any new natural gas from the country’s shale geologies, will arrive on global markets much later than expected.

And that's a big deal for the companies building the hugely expensive LNG export terminals set to begin operation in 2015. The worry has been that a world awash in natural gas, especially liquefied natural gas, because of the US and Australian energy booms (and the potential booms in China, Argentina, Mexico, and Russia) would quickly drive down the premium that countries such as Japan pay for liquefied natural gas. Within a few years, you could forget about LNG selling for $14 or $17 a million BTUs in Asia and natural gas prices in those markets would start to fall toward current US prices of $4 a million BTU. That would make any—but the earliest LNG export facilities—so obviously unprofitable that they might never even be completed.

Russia’s potential reserves of oil and natural gas are huge. Estimated gas reserves in 2013 made up 17% of the world total, according to energy consultant Wood Mackenzie. Reserves under the Kara Sea, in the Russian Arctic, hold more oil—oil companies project—than the entire Gulf of Mexico.

But production of oil and natural gas from conventional sources is barely holding steady. Before the sanctions resulting from the war in Ukraine, projections had production from tight oil and natural gas from shale geologies and from Arctic reserves keeping Russian production steady through 2025. Without oil and natural gas from those unconventional sources, Russian production is projected to start to fall sometime between 2017 and 2020. Sanctions could cut Russian production by as much as 20% from earlier, pre-sanction estimates. Pre-sanctions, Russia planned to increase LNG production to 35 to 40 million metric tons by 2020 from the current ten million metric tons and to double its share of the global LNG market to 10%.

Now?

Much of the attention to date about the effect of sanctions has focused on the reduction in capital available to Russian oil companies for exploration, development, and production. US sanctions, for example, restrict capital market access for Rosneft, the state-owned oil company that is Russia’s largest producer. That will make it more difficult for Rosneft to raise the capital it needs to build LNG facilities in Siberia. In the last week of August, Rosneft CEO, Igor Sechin, told Germany’s Der Spiegel that he wasn’t worried about access to capital. The company has proposed raising investment cash by selling a stake to China.

Access to capital certainly won’t be an insignificant problem, but the real crunch is likely to come in oil field equipment and technology. Drilling technology isn’t the choke point—an area called “completion” is. Completion technologies include all the stuff that goes into turning discoveries of natural gas in shale into extractable natural gas through processes such as fracking. In addition, US companies hold most of the licenses covering liquefaction itself.

It’s unlikely that the world can afford to ignore Russia’s energy reserves for very long—developing and developed economies need the energy—but it does look like the development of these resources will take longer than expected.

That will be a boon to a company like Cheniere Energy (LNG), the holder of the first unrestricted US license for the export of LNG. Cheniere’s Sabine Pass facility is scheduled to go into production at the end of 2015. (Cheniere is a member of my Jubak Picks portfolio.)

But I also think these trends turn Sempra Energy (SRE), the second company to get an unrestricted export license, into a buy. As of September 3, I’m adding shares of Sempra to my Jubak Picks portfolio with a target price of $117 a share by June 2015.

Sempra got its final permit from the Federal Energy Regulatory Commission in June for its Cameron, Louisiana export facility. Exports are expected to begin in 2018.

Sempra isn’t anything like the pure play on LNG exports that Cheniere is, so you shouldn’t expect the same explosive gains. (Cheniere shares were up 208% as of the close on September 2 from my June 25, 2013 pick.) The company is a holding company that includes the regulated San Diego Gas & Electric utility in California.

But Sempra has two businesses that should start to push earnings and the share price higher toward the end of 2014 and in 2015. Besides the Cameron export facility—which won’t contribute to earnings until 2018—the company has a growing natural gas pipeline business that delivers US gas to Mexico. Energy costs in Mexico run about twice US levels and Mexico’s political and business leaders see expanding energy supplies and lowering energy prices as a key to the country’s economic (especially in the manufacturing sector) growth. That pipeline and gas infrastructure business carries higher margins than the regulated utility business: Standard & Poor’s sees EBIT (earnings before interest payments and taxes) going from 17.8% in 2013 and 16.2% in 2012 to 20.5% in 2015.

A target price of $117 works out to capital appreciation of about 11.4% by next June. Add in a 2.5% yield that provides some support in any potential correction and I think this is a reasonably attractive play over the next nine months that will show its legs in the second half of 2015.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.